Method of capital creation for tax-exempt organizations

ABSTRACT

A capital creation process for a qualified (i.e., tax-exempt) organization to raise funds for capital improvements, subsequently eliminating the obligation to ever repay the debt. The tax-exempt bonds are offered to selected investors in a pool that meets certain parameters that may include age, wealth and affiliation with the tax-exempt organization issuing the bonds. The investor establishes an individual charitable remainder trust with the purchased tax-exempt bonds as the asset. The qualified organization is named as the irrevocable residual beneficiary of the trust. The investor receives an annuity equal to the bond interest income from the charitable remainder trust for life. Upon the death of the investor, the bonds are returned to the organization, which can then extinguish the liability on its financial statements. The investor in the tax-exempt bonds is able to deduct from his individual income tax return, an amount under applicable tax laws for the contribution of the tax-exempt bonds to the charitable remainder trust. The investor establishes an irrevocable life insurance trust with a gift of the tax saving resulting from the income tax deduction, and names his heirs or others as beneficiaries. The trustee purchases a life insurance policy, in at least an amount equal to the purchase price of the tax exempt bonds, with the tax savings resulting from the tax deduction and places the asset in the life insurance trust to replace the amount of wealth contributed originally to the charitable remainder trust.

CROSS REFERENCE TO RELATED APPLICATION

This application is a divisional application and claims priority underthe provisions of 35 U.S.C. §120 of U.S. patent application Ser. No.10/184,780, filed Jun. 27, 2002 in the name of Leigh S. Fultz. Thedisclosure of said application is hereby incorporated herein in itsentirety, for all purposes.

BACKGROUND OF THE INVENTION

Low cost, tax-exempt financing is available to all state and localgovernments (i.e., cities, counties, townships, school districts,special districts, and authorities) as well as for many tax-exempt501(c)(3) institutions such as hospitals, universities, colleges andvolunteer fire departments. Tax-exempt financing through the sale oftax-exempt bonds offers practical financial alternatives to paying cashfor capital expenditures by state and local government units andtax-exempt institutions. Simply state, a bond is a debt instrument thatis issued for a period of more than one year, with the purpose ofraising capital by borrowing. The Federal government, states, cities,corporations, universities, and many other types of institutions sellbonds. A bond is generally a promise to repay the principal investmentamount along with interest on a specified date.

May different types of projects may qualify for tax-exempt financing.Municipal assets, airports, public transit facilities and vehicles,school buildings, hospitals, nursing homes, manufacturing facilities andother types of projects may qualify. Financing is generally obtainedthrough the issuance of bonds. In addition to comply with state lawsthat enable the financing of a project, there is also the need to complywith restrictions found in the federal law. Federal tax law may imposelimitations on the dollar amount that can be financed with tax-exemptdebt. The Federal tax law considerations are very complex, but havefully been considered and complied with in the capital creation processdescribed herein.

the capital creation process of the present invention enables tax-exemptorganizations to develop financing for major capital needs. The focus ofthe method is on those organizations that are eligible to financecapital projects through the sale of tax-exempt bonds.

The capital creation process provides a system through which atax-exempt organization can finance its capital needs through theissuance and sale of tax-exempt bonds. Through this method, theinstitution's obligation is to pay the interest due on those bonds, atthe bond's market rate. However, the present invention eliminates theburden of repaying the debt principal itself and reduces the number of,and consequently, the amount of the interest payments as well.

The capital creation process also provides a system for thoseinstitutions or organization eligible to finance major capitalobligations with tax-exempt bond financing to substantially enhancetheir borrowing capacity. The present invention provides a novel methodfor the integration of several financial planning tools to result in theelimination of the burden of debt repayment of the tax-exemptinstitution issuing the bonds.

The capital creation process contemplates the novel integration of thefollowing planning tools:

1. Tax-Exempt Bond Issue;

2. Charitable Remainder Annuity Trust (CRAT);

3. Single Premium, or Short Pay, Life Insurance Policies with guaranteeddeath benefits until at least age 95; and

4. Irrevocable Life Insurance Trust.

In one aspect of the invention, a capital creation process is providedfor a qualified (i.e., tax-exempt) organization to raise funds, throughthe issue of bonds, for capital improvements while eliminating theobligation to ever repay the debt. A pool of potential investors isfirst established as the individuals that will be first offered anopportunity to purchase tax-exempt bonds in order too raise the desiredcapital improvement funds. The tax-exempt bonds are offered to selectedinvestors in the pool that meet certain parameters that may include age,wealth and affiliation with the tax-exempt organization issuing thebonds. The qualified organization then receives the proceeds of the bondsale and can immediately use the funds for its capital improvementprojects. The investor then establishes an individual charitableremainder trust with the tax-exempt bonds as the asset to be contributedto the trust. The qualified organization is named as the irrevocableresidual beneficiary of the trust. Periodically, the charitableremainder trust is paid an annuity representing the interest due on thebond issue. The investor and his spouse, if so named, receive theinterest income from the charitable remainder trust for the life of theinvestor, and the life of the spouse. Upon the death of the investor,and spouse if named, the bonds are returned to the organization, whichcan then extinguish the liability on its financial statements.

In another aspect of the invention, the investor the tax-exempt bonds isable to deduct from his individual income tax return, an amount underapplicable tax laws for the contribution of the tax-exempt bonds to thecharitable remainder trust. The then establishes an irrevocable lifeinsurance trust with the tax savings resulting from the tax deduction.The trustee of this trust then purchases a life insurance policy toreplace the amount of wealth contributed to the charitable remaindertrust. The investor names his/her heirs or others as beneficiaries ofthe life insurance trust in at least an amount equal to the purchaseprice of the tax-exempt bonds. The tax-exempt organization may also bedesignated as beneficiary to receive an additional bequest from theinvestor, particularly if the investor has a strong affiliation with theorganization.

Another novel aspect of the capital creation process is a non-binding,but acknowledged intent of the investor to commit his investment (bondpurchase) to a charitable remainder annuity trust (CRAT), specificallyand irrevocably designated as to the residual distribute, i.e., thequalifying organization, which is also the bond issuer. The specificcontribution of the bonds to the CRAT is an integral and necessary partof the capital creation process. By use of this contribution method, thefollowing objectives are met:

1. the CRAT trustee is relieved of the burden of diversification ofholding;

2. the bonds themselves are now positioned to “return” to theinstitution at the deaths of the income beneficiaries of the CRAT;

3. the income stream to the income beneficiaries is assured;

4. the tax-free nature of the income is assured; and

5. the assets of the CRAT are significantly insulated from creditorclaims of both institution and beneficiary creditors.

Some of the benefits of the institutional user of the capital creationprocess are more specifically identified below. The capital creationprocess:

1. allows the issuing institution the opportunity to utilize debtfinancing to a far greater degree than historically possible, as much as2 times as much debt capacity with no increase in cost;

2. broadens the financial support constituency of the issuinginstitution;

3. improves the financial ratios and balance sheets of institutionalusers;

4. gives the investor lifetime tax-free income, more asset transferpotential than would otherwise be available to the investor, and theadded benefit of making a substantial gift to the charitable institutioninvolved;

5. provides added creditor protection and security for the investor;

6. accelerates the institution's ability to proceed with capitalprojects at an earlier date than might otherwise have been possible,thus realizing cost savings and use, both potentially substantial; and

7. provides a platform at a time of enormous increase in capital needand capital gift demands to pursue investment and business relationshipsas an alternative to the customary funds development philosophy ofoutright gifts.

BRIEF DESCRIPTION OF THE DRAWINGS

The invention is better understood by reading the following detaileddescription of exemplary embodiment in conjunction with the accompanyingdrawing wherein:

FIG. 1 illustrates the steps of the capital creation process inaccordance with an exemplary embodiment of the invention.

FIGS. 2A-2D illustrate an example of the use of the capital creationprocess of the invention.

FIG. 3 illustrates an investor pool database format in accordance withan exemplary embodiment of the invention.

DETAILED DESCRIPTION OF THE INVENTION

The capital creation process of the present invention makes use ofseveral basic financial planning tools that are provided for in theInternal Revenue Code (IRC). The capital creation process utilizes thefollowing elements as part of the method.

1. Tax-exempt financing authority issues tax-exempt bonds for qualifyinginstitutions, organizations, and municipalities as detailed in the IRC§§ 141-150.

2. Older, wealthy individuals invest a significant portion of theirassets in tax-exempt income producing opportunities. The age 65 and overdemographic segment is growing disproportionally larger than otherdemographic age groups and offers the prospect of more and more largenet worth investors purchasing investment grade, tax-exempt bonds fortheir portfolios.

3. The subsequent incentive and opportunity for such investors who arefinancial supporters of one or more charitable organization to commit tocertain of their assets, on a deferred basis, to their selectedcharities, while retaining tax-free income (i.e., the economic benefitsof their investments) for life.

4. This is accomplished through the use of the Charitable RemainderAnnuity Trusts (CRATs), for the realization and deployment of net taxsavings generated through the income tax deduction resulting from acontribution to a charitable remainder annuity trust.

5. The availability of life insurance death benefit proceeds, as wealthreplacement tool, exempt from income tax for the donor's selectedbeneficiaries.

6. The use of Irrevocable Life Insurance Trusts (ILITs), or possiblyother vehicles, to provide significant wealth transfer to suchbeneficiaries that is estate tax free.

The present invention combines various tools into a unique method forcapital creation for tax-exempt entities. Through the proper applicationof the capital creation method, an institution can raise the capital itneeds, recognize its obligation to pay interest at the stated rate attime of issue, but can relieve its burden of repaying the debt itselfover time. The institution can borrow large amounts, but eliminate theobligation of paying back the debt.

The capital creation process of the present invention is designed topermit an individual to make a substantial contribution to a tax-exemptorganization while maintaining the value of this estate for the benefitof his heirs. A brief description of the instruments used in the capitalcreation process, i.e., Charitable Remainder Trusts (CRT) andIrrevocable Life Insurance Trusts (ILIT) is provided below.

A Charitable Remainder Trust is a trust that provides for a specifieddistribution, at least annually to one or more beneficiaries, at leastone of whom is not a charity, for life of for a term of years with anirrevocable remainder interest to be held for the benefit of, or paidover to, a tax-exempt organization. The specified distribution must be asum certain which is not less than 5% of the initial net fair marketvalue of all property place in trust (charitable remainder annuitytrust) or a fixed percentage that is not less than 5% of the net fairmarket value of the trust assets valued annually (charitable reminderunitrust). To qualify as a charitable remainder trust, the trust beeither a charitable remainder annuity trust or a charitable remainderunitrust. The trust document must require the periodic payment of theannuity amount that begins in the first year of the CRT to continue forthe life of named individuals or for a term of years not to exceed 20years.

The investor taxpayer may be allowed to charitable deduction, subject tothe normal charitable deduction limitations in the year the trust isestablished. For an annuity trust, the amount of deduction the investortaxpayer is entitled to will be the net fair market value of theproperty placed in the trust, less the present value of the annuity.Because the grantor maintains an annuity interest in the CRT, the valueof the CRT at death is includable in the grantor's estate for estate taxpurposes. However, IRC § 2055(a) provides that a grantor is allowed adeduction from the value of the gross estate for bequests to charitableorganizations. The amount of the deduction is the value of the propertyincluded in the estate and transferred to the charity. Unlike thepercentage limitations on the income tax deduction allowed at the timeof contribution, there are no percentage limitations on the estate taxdeduction.

The second part of the capital creation process transaction contemplatesthat the investor taxpayer will replace the wealth being donated to thetax-exempt organization in the CRT with the proceeds of a life insurancepolicy. This transfer of wealth to the investor's heirs may be made freefrom federal transfer tax by creating and funding an irrevocable lifeinsurance trust. The trustee will acquire a life insurance policy on thelife of the investor, or a second to die policy on the investor and theinvestor's spouse. The trust will own the policy and will be thebeneficiary of the policy. The trust instrument names the income andprincipal beneficiaries of the trust. The investor may makecontributions to the trust that are treated as gifts in order to pay theinsurance premium if necessary. The capital creation processcontemplates the initial contribution to this trust being the taxsavings from the deduction of the allowable amount due to the investor'sgift to the charitable remainder trust.

There are several advantages to replacing the wealth transferred to theCRT with an equal face value of life insurance. The most significantaspect is that the proceeds of the life insurance policy may betransferred to the beneficiaries free from federal transfer tax. If theinvestor held assets outside of the CRT at death, the investor's heirsmay likely receive less than half of the assets after satisfying thefederal estate and other death tax liabilities. By contributing theassets to a CRT, and replacing them with life insurance, 100% of thevalue of the assets in the form of cash insurance proceeds will bepassed down to their heirs. If the insurance policy is held in trust, itis possible to protect the proceeds from both the investor's and thebeneficiary's creditors. Upon the death of the investor, the proceeds ofthe insurance policy are paid directly to the trust as beneficiary.

The following is an example of the tax and economic effects ofparticipation in the capital creation process. Consider donors that arehusband and wife, each of whom are 65 years old. The donors purchase $5Mof tax-free municipal bonds issued by XYZ University and then contributethose bonds to a Charitable Remainder Annuity Trust (CRAT), which willpay the donors 5% per year over their lifetimes, then the balance to theuniversity. This contribution generates a tax deduction which results ina significant tax savings currently to the investor. Assume further thatthe CRAT holds the bonds until both the husband and wife die. The seconddeath occurs 20 years after creation of the trust. Assume further thanan IRS § 7520 rate of 6% applies. The husband and wife fund anIrrevocable Life Insurance Trust (ILIT) with sufficient funds (theincome tax saving just described) to acquire a $5M last-to-die policy.Their children are beneficiaries of the ILIT.

The donor's income tax deduction for the donation to the CRAT is 41.52%of the amount transferred or $2.76M. The cash value of the income taxdeduction, assuming the donor's cumulative federal and state income taxrate is 42% is $871.92K. The cash paid to the donors from the CRT is$250K per year. The present value cost to the University for the paymentof the interest over 20 years, assuming a present value discount rate of8%, is approximately $2.45M. The residual available to XYZ University is$5M, more than two times its cost. Over a period of 20 years, the cashpaid to the donors from the CRAT is $5M—tax free. The funds available tothe children of the husband and wife donors is $5M—tax free. The totalamount paid to the investor and heirs would be $10M tax free.

An institution begins the capital creation process by determining thescope of its immediate capital needs. Following determination, theinstitution identifies, through a myriad of methods, a constituency ofprospective investors who are likely to be interested in (1) acquiringtax-free income via the purchase of tax-exempt bonds; (2) making a majorcontribution to the issuing institution with minimal, if any,out-of-pocket costs; and (3) passing the assets (bonds or bond value) ortheir equivalents to the investor's chosen beneficiaries.

The issuance of tax-exempt bonds to an investor provides a life timestream of tax-free income protection security for the investor's family,and the opportunity to be of great assistance to the tax-exemptorganization's capital projects. Following the death of the investor andthe investor's spouse, the investor's designated heirs should receivefunds that are equal to or greater than the after-tax value of theoriginal investment involved, had the investor continued to own theinvestment until his death. An added benefit of purchasing tax-exemptbonds for the investor is that such purchase will have significantprotection from creditor claims.

The investor pool for the tax-exempt bond issue is identified from amongthe bond issuing entity's financial support constituency, even includinga constituency of one, or a handful of investors. The concept of aninvestor pool is unique in that the general process for such an issue isto regain a bond underwriter who would commit to the purchase of theissue and be responsible for the sale of the bonds to a broad market(i.e., bond Funds and investors with no abiding interest or commitmentto the issuing institution), with no residual interest to the favor ofthe issuer, other than the loan itself. The capital creation processoffers the issuing institution the opportunity to substantially increaseits prospective donor pool with those individuals who are not ready todetach themselves from assets currently, and more specifically, notready to detach from substantial assets in the form of large capitalgifts. However, the capital creation process begins the donative processand relationship with the institution by way of an investment decisionand business relationship. The investor is making a loan rather thanoutright gift to the issuing institution, initially.

An investor pool database can be established by the tax-exemptorganization or by a capital creation process service provider thatenables the organization to search for qualified individuals in theinvestor pool by accessing the service provider's web site where suchpotential investor information can be stored for remote access. Sinceage, wealth and affiliation are important factors for selecting thepotential investors for purchasing the bonds, these factors are includedin the searchable database. FIG. 3 provides an example format showingseveral of the fields that are likely to be included in the investorpool database. These include investor name and date of birth, spousename and date of birth, investor address (business or home), estimatedannual income (alternatively, estimated net worth) and affiliation withthe organization.

After a pool of potential investors is located and invited toparticipate in the purchase of tax-exempt bonds, the interested partiesexecute a non-binding “letter of intent” indicating their level ofparticipation in the capital creation process. The institution thengains approval through normal regulatory processes to proceed with thefinancing of the capital projects through the issuance of tax-exemptbonds. The institution issues the bonds, which are then purchased by thegroup of interested investors. The institution is then in receipt of thefunds it sought for the capital projects identified and can deploy thosefunds accordingly.

Following the purchase of the funds by the investors, those investorselecting to participate in the capital creation process proceed tocontribute their bond holdings to a Charitable Remainder Annuity Trust(CRAT). Each investor establishes his or her own CRAT, retaining incomerights from CRAT for life, and the life of a spouse or other person ifdesired. Following the investor's donation to his individual CRAT, thebonds are now owned by the CRAT. The tax-free interest paid on the bonddebt is paid to the CRAT, the CRAT then pays the annuity amount to theincome beneficiaries of the CRAT. The annuity amount is equal to thetax-free income the CRAT subsequently receives. The income beneficiariesof the CRAT are the investor for life and then the investor's spouse, ifdesired. The income beneficiaries should receive the tax-free income forlife.

By designating the issuing institution as irrevocable residualbeneficiary of the CRAT at the deaths of the income beneficiaries, theissuing institution, which would normally enter the debt issue as aliability on its books along with the additional asset of the fundsraised, now has an additional asset to add to its financial statements.This would be in the form of the residual interest in the CRAT measuredby the current value of the aggregated deductions of all theparticipating investors (over 41% of the total amount contributed to theCRAT in the above example).

If the average age of the investor pool was 65, the combined value ofthe residue of $100M in bonds committed to the capital creation processwould be approximately $41M at the inception. Therefore, in addition tothe normal financial entries of $100M of debt and $100M in assets, theissuing institution would add an additional $41M in assets to itsfinancial ratios. Each year, this additional asset amount wouldincrease, due to the aging of the investor pool. As the investors movecloser to death, the institution moves closer to the ultimaterealization of the termination of the CRAT.

The positive results to the financial statement of the issuinginstitution as just described, contribute significantly to theaccreditation process for a university using the capital creationprocess. That is, the enhancements to the institution's financial ratiosare material to the accreditation process for the institution as well asthe institution's financial ratings.

The statistical average of tax-exempt bond investors is more than age 65for obvious reasons: age, security, and a need for regular andtax-favored income. The bonds issued and purchased as part of thecapital creation plan process are designed to be a non-serial, thirtyyear, balloon bond issue. The average bond investor will reach his/herultimate maturity years ahead of the maturity of the bonds themselves.The average life expectancy of a 65 year old couple is approximately 20years.

At the death of the last income beneficiary of the CRAT, the incomepayments cease. The assets remaining in the CRAT (the bonds) aredistributed to the named charitable organization, i.e., the issuer ofthe bonds. In effect, the institution ends up owning its own debtinstruments and the debt self-extinguishes.

The investor, upon completing the initial contribution of the bonds tothe CRAT, receives an income tax deduction based on the age of theincome beneficiaries of the CRAT and the value of the retained incomeinterest. The older the income beneficiary, the higher the tax deductionand the higher the net tax savings to the contributor. The current taxdeduction for 65 year old couple retaining 5% annuity interest in theCRAT for the life of both, is approximately 41% of the value of theproperty donated.

The capital creation process contemplates that the investor will use thesavings generated by the tax deduction to purchase a single premium lifeinsurance policy with a death benefit at least equal to the net amountof the original bond investment that could be passed to the investor'schildren or other beneficiaries. If the investor had personally ownedthe bonds at death, the asset would be included in the investor's estatefor estate tax purposes. In larger estates, it is not unusual for theestate tax to consume as much as 50% of the assets or more. Bycreatively structuring the ownership of the life insurance policy, it ishighly likely that the insurance proceeds can escape estate taxes,thereby increasing the wealth that would otherwise have passed to theinvestor's heirs.

In order for the wealth replacement life insurance proceeds not to beincluded in the taxable estate of the investor or the investor's spouse,the policy cannot be owned or controlled by the insured/CRAT incomebeneficiaries. The capital creation process contemplates that theinsurance policy will be owned by the Irrevocable Life Insurance Trust(ILIT), established for the ultimate benefit of the investor's childrenor other individuals. There are other ownership options available forconsideration under the capital creation process; however, the ILIT islikely to be the simplest.

As a result of the capital creation process, the institution receivesthe capital it currently needs to fund projects identified atcompetitive market interest rates. Its real or effective cost is theinterest payment on the bond issue. With the average age of the “pool”of investors at 65, the interest payment period would be in the 20-yearrange. The present value of a 5% interest stream discounted at 9% (as anestimate of the institution's investment expectation over that sameperiod) would be approximately 45% of the face amount of the bond issue.In essence, the institution could finance approximately 220 percent, or2.2 times the amount of capital needs it could ordinarily do without thecapital creation process. If an institution can handle a $100M debtobligation under conventional bond issue procedures, using the capitalcreation process, it could effectively finance $220M for approximatelythe same cash flow obligation. This enables an institution to accomplishsignificantly more today in the way of capital improvements then itcould under normal procedures for raising capital. As a result, buildingprojects can commence earlier than otherwise planned, savingsubstantially on construction and other costs that would escalatethrough delay. The other benefit to the institution is that the debtprincipal will be extinguished over time by using the capital creationprocess.

The investor in tax-exempt bonds receives tax-free income for his lifeand the life of his spouse, if desired. This insulates the investmentassets from the claims of the creditors. The investor provides his heirswith net assets equal to or greater than that deliverable if the assethad been retained by the investor until the investor's death.Ordinarily, the investor, if he desires the income deliverable from thisinvestment over life, would retain enough of an incidence of ownershipof the asset to include it in his estate at death. As part of thecapital creation process, the investor provides a bequest to the issuinginstitution that is instrumental in the institution's ability to reachits own objectives.

The capital creation process broadens the institution's prospectiveconstituency in a demonstrable way. The capital creation processproduces a new “population” of supporters and participants who canparticipate in the capital creation process, even though they are unableor unwilling to make significant current outright donations. Withcontinued relationship building between the tax exempt organization andthe investors, not only can the original bond investment be returned tothe issuer for extinguishing, but an excellent case can be made fornaming the institution as a beneficiary of the portion of the wealthreplacement life insurance policy. Specifically, that portion would bethat amount over and above the net amount that would have been receivedby the investor's heirs had the investor simply bought and held bondsuntil death under the conventional process.

As an example of the latter point, consider the following scenario. Aninvestor purchases and holds $1M dollars in bonds. If the investor's orspouse's estate is in the 50% marginal estate tax bracket, the estatetax on the bonds would be $500,000, leaving $500,000 to be distributedto the investor's heirs. Alternatively, assume that the investorparticipates in the capital creation process and qualifies for $900,000of wealth replacement insurance. The beneficiaries of the insuranceproceeds will receive $900,000, most of which, if not all, will be freefrom estate tax. The heirs or beneficiaries are $400,000 ahead of theconventional buy and hold strategy. Serious consideration should begiven by the bond investor to allocate this excess amount ($400,000) tothe issuing institution. Added incentives could be considered by theinstitution at the inception of the capital creation process toencourage such additional philanthropy.

The capital creation process offers both the issuing institution andinvestor a “win-win” result. The institution obtains the funds it needsfor capital improvements at definable and substantially reduced cost.The investor should receive tax-free income for life with no reductionin size of the net estate passed to his heirs, and possibly an increase.

FIG. 1 illustrates the steps performed in the capital creation process.At step 100, a tax exempt organization issues a bond offering toselected investors. The selected investors purchase these bond offeringsas indicated in step 102. The tax-exempt organization receives the fundsfrom the investors for the purchase of the tax-exempt bonds and utilizesthe proceeds for capital projects as indicated in step 104. Followingthe purchase of the tax-exempt bonds, the selected investors establish acharitable remainder trust, as indicated in step 106. In establishingthe charitable remainder trust, the investors name the tax-exemptorganization as the irrevocable residual beneficiary of the CRT. This isshown in block 108 in FIG. 1. The investors then place the bonds fromthe issuing institution in the CRT as gifts as indicated in step 110.Periodically, and at least annually, the tax-exempt organization paysthe bond interest to the CRT, as indicated in step 112. The investorsreceive the tax-free bond income/interest as an annuity from the CRT forlife, as indicated in step 114. Upon the death of the investors, the taxexempt organization receives the bond without having to repay them, asindicated in step 116. Furthermore, the tax-exempt organizationextinguishes the bond/debt liability on its books as indicated in step130.

Following the placing of the bonds in the CRT as gifts, in step 110, theinvestors take a tax deduction for the CRT, yielding a tax savings thatdepends on the individual investor's tax bracket. This is indicated instep 118. This is followed in step 120 with the investor establishing anirrevocable life insurance trust by contributing the tax savings justdescribed, providing tax-free death benefits to beneficiaries. Inestablishing the irrevocable life insurance trust, the investordesignates his heirs and/or a tax-exempt organization as thebeneficiaries of the life insurance trust as indicated in step 122. Thetrustee of the irrevocable life insurance trust purchase a lifeinsurance policy on the investor with the tax savings contributed by theinvestor as indicated in step 124. The beneficiaries receive theproceeds from the life insurance trust upon the death of the investors,as indicated in step 126.

FIGS. 2A-2D illustrate an example of the use of the capital creationprocess of the present invention. Step 1 of the process is depicted inFIG. 2A. XYZ University makes a bond offering of $100M to potentialinvestors. The potential investors purchase the issued bonds from theuniversity. In this scenario, the bonds will be purchased by “friends”of XYZ University. The individual bond purchasers identified would beaged 62 or older. In step 2 of the process, XYZ University utilizes the$100M received from the investors for the capitalization of a number ofidentified projects. Step 3 of the process is illustrated in FIG. 2C.The investors set up a Charitable Remainder Trust with the XYZUniversity designated as the residual beneficiary. The investors receivetax-free bond income/interest in the form of an annuity from the CRATfor life. As a result of the gift of bonds into the Charitable RemainderTrust, the investor receives a $37M tax deduction or $14.8M in taxsavings. Step 4 of the process is shown in FIG. 2D. The investorscontribute the $14.8M from the tax savings to the life insurance trustwith the trustee of the life insurance trust using these funds topurchase a life policy with a life insurance company. The $100M tax-freedeath benefit is paid to the ILIT to exclude the life insurance proceedsfrom inclusion in the investor's estate for estate tax purposes. Some ofthe proceeds of the tax-free death benefit may also go back to XYZUniversity as a partial beneficiary. In summary, the university receives$100M today for a cost of 5% (interest only). At the death of theinvestors, the university receives the proceeds (i.e., the $100M bonds)from the CRT as the irrevocable residual beneficiary. The heirs of theinvestors receive $100M in life insurance proceeds for replacement ofthe CRT assets donated to the University. Because of the typical age ofthe investor involved in the capital creation process of the presentinvention, it would generally be necessary to negotiate with the lifeinsurance company to obtain the best possible rating for the investorfor the face amount of the life insurance that the investor wants toobtain.

While the invention has been particularly shown and described withreference to an exemplary embodiment thereof, it will be understood bythose skilled in the art that various changes in form and detail may bemade without departing from the spirit and scope of the invention.

1. A method for enabling a donor to contribute a portion of hisfinancial assets to a qualified organization while preserving a currentvalue of his estate, comprising the steps of: purchasing a tax-exemptbond offering from the qualified organization; establishing a charitableremainder trust with the tax-exempt bond contributed as assets;specifying the qualified organization as an irrevocable residualbeneficiary of the charitable remainder trust; deducting from a currenttaxable income an amount allowed under applicable tax laws for thecontribution of the tax-exempt bond to the charitable remainder trust;establishing an irrevocable life insurance trust with a gift of taxsavings resulting from the deduction of the allowed amount; andpurchasing a life insurance policy with the tax savings gift, at leastequal in amount to the purchase price of the tax-exempt bond, and withthe life insurance policy being held as an asset in the irrevocable lifeinsurance trust.
 2. The method of claim 1, further comprising the stepof designating the donor's heirs as beneficiaries of the irrevocablelife insurance trust.
 3. The method of claim 1, further comprising thestep of designating the qualified organization as a beneficiary of theirrevocable life insurance trust.
 4. The method of claim 1, furthercomprising the step of receiving an annuity amount based on a face valueand a selected interest rate mirroring that of the tax-exempt bondscontributed to the charitable remainder trust at least on an annualbasis.
 5. The method of claim 4, wherein the step of receiving theannuity amount begins in the first year of the charitable remaindertrust and continues for the life of at least one named individual.
 6. Amethod for enabling a qualified organization to raise an amount ofcapital by transaction with a donor carrying out the method of claim 1,wherein the qualified organization issues the tax-exempt bond to thedonor, and further comprising payment of an annuity amount based on aface value and interest rate of the tax-exempt bond to the charitableremainder trust at least annually for distribution to the donor, whereinpayment of the annuity amount begins in the first year of the charitableremainder trust and continues for a period not to exceed 20 years. 7.The method of claim 1, wherein the charitable remainder trust is createdas a charitable remainder annuity trust.
 8. The method of claim 1,wherein the charitable remainder trust is created as a charitableremainder unitrust.
 9. The method of claim 1, wherein the qualifiedorganization includes any one of a state government unit, a municipalgovernment unit, and a tax-exempt organization as defined in InternalRevenue Code.
 10. The method of claim 1, wherein the step ofestablishing a charitable remainder trust is performed after thepurchase of the tax-exempt bond offering.
 11. The method of claim 1,further comprising the step of executing a letter-of-intent to establisha charitable remainder trust before purchase of the tax-exempt bond.